Analysts' Forecasts and Investments in Information Technology

Previous research has shown that investments in intangible assets, especially research and development, can increase the difficulty in forecasting a company's earnings. This information risk translates into a lower market value for the firm. Because IT investments have many intangible characteristics similar to research and development expenditures, information technology investments may also increase information risk. Tests using IT spending data for over 1000 firms show that IT spending does increase earnings forecast dispersion and error. Increased dispersion and error might affect the market value of the firm. Using a residual income valuation model, results show that as IT spending increases, residual income is capitalized into market value at a decreasing amount, controlling for diminishing marginal returns to IT spending. This research highlights the importance for IT-intensive companies to find ways to decrease information risk through other forms of communication with market participants